How to screen for bogus parts

Buyers need to make sure their nonfranchised distributors deal with reliable suppliers

James Carbone -- Purchasing, 12/8/2005

It's no secret many electronics buyers like to make opportunistic purchases from independent distributors who often sell parts for considerably less than franchised distributors.

However, some buyers are concerned about getting stuck with counterfeit components from independent distributors, who often buy parts from Chinese sources. Counterfeiting is a thriving cottage industry in China for everything from Rolex watches and designer handbags to software and semiconductors.

"In electronics, a lot of counterfeit components are actually substandard parts," says John Irving, executive vice president sales and marketing for independent distributor Fusion in Andover, Mass.

"Some products are called counterfeit yet they were truly made by the manufacturer whose name is stamped on the chip," he says. "But the parts don't perform up-to-spec."

Often, a chipmaker may have a lot code of parts that didn't pass the company's quality requirements. For whatever reason, the parts were not destroyed and find their way to the street, Irving says. Sometimes the parts end up in China and resold around the world.

Sometimes parts are used components that were pulled off boards and then sold as new.

Savvy buyers can protect themselves from getting burned by bogus, substandard or used parts by being more selective about which independent distributors they buy from. Most major independent distributors have rigorous screening processes that weed out counterfeit or substandard parts. Those companies tend to have money-back guarantees if parts are found to be defective, substandard or counterfeit. Fusion's policy is to refund 105% of the price.

Buyers should look for independent distributors that have a screening process and use an escrow service when the distributor buys parts from overseas sources.

"An escrow service is a third party that will hold the money until the transaction has been approved by the receiving party," says Nick Davis, president of the Independent Distributors of Electronics Association (IDEA). Here's how it works: An independent distributor decides to buy $10,000 in components from a Chinese source. The distributor wires the $10,000 to an escrow house. The parts are then shipped by the source to the distributor. The distributor then screens and/or tests the parts to determine if they are good. If they are, the distributor notifies the escrow service and the money is released to the seller. If there is a problem with the components, the distributor tells the service and sends the parts back to the seller. The money is wired back to the distributor.

Buyers who purchase parts from distributors that use an escrow service and inspect parts get a degree of assurance that the parts are genuine and meet spec.

"Using an escrow service is important because a lot of Asian vendors like to be wired money up front," says Davis. "That is a very dangerous practice because there is a lot of fraud out there. There is very little government control in China about stopping this."

He adds distributors don't use an escrow service for all parts, but the service should be used for overseas transactions.

"We recommend using an escrow service for China unless you have an approved source of supply or have an established relationship with the source," says Davis.

Some distributors don't use an escrow service, but insist on a net one or net two-day payment. That means the seller ships the parts and the distributor has one or two days to inspect them. If the parts are acceptable, the distributor wires payment. If there is a problem, the parts are returned.

If a supplier doesn't agree to a net one or two day term, that's a sign there could be a problem with the components.

Many independent distributors began beefing up their quality control departments about three years ago when a lot of counterfeit or substandard parts began entering the channel.

"About four years ago, we were flooded with nonconforming parts," says Gary Morrissey, vice president of operations for independent distributor Smith and Associates in Houston. "We had 20 shipments a day that we were rejecting. It was a nightmare." The year before Smith had rejected only about five shipments per week.

Smith bolstered its parts inspection and testing.

"We pull manufacturer specs before an incoming shipment hits the door," says Morrissey. "We have a technician who checks manufacturer specs against the products coming in." Another technician looks at samples with a microscope.

Smith says it has also weeded out questionable sources.

"Three years ago we took parts from everybody. Now we have restricted our suppliers," says Morrissey. "We had thousands of suppliers and now we are down to hundreds."

Smith also ranks its suppliers with an A, B, C, or D rating. "A" suppliers have done business with Smith for years and have proven to be reliable. Their shipments require a minimum amount of inspection. "B" and "C" suppliers have done less business with Smith and their shipments require more inspection. "D" suppliers have shipped problem parts and have lost Smith's business.

Davis says reliable independent distributors inspect every shipment. An inspection can include a chemical test to make sure a part has not been re-marked, a microscope inspection, and a full-blown test if it is suspect.

"Say you receive 10 tubes of parts in a shipment of ICs. The distributor should pull out one sample for every one of those tubes and run it through an inspection process," says Davis. Each tube may have 10 to 80 parts depending on the size and type of part.

The leads of the part should be inspected and the component should be examined under a microscope. The date code and lot code should be checked and matched against the codes of other parts in the tubes.

"If a buyer has a suspicious source of supply, an acetone test on the part can determine its authenticity," says Davis. Acetone is placed on the part and if the part has been re-marked, the fake part number will wipe off.

Parts re-marking is done by some counterfeiters. Some parts have the same package and look alike. A linear 64 series IC costs about 10¢ and might have the same package of an A/D converter which may cost $4, says Davis. A counterfeiter could grind off the original part number of the cheaper part and replace it with the number of a more expensive component.